Zero-based budgeting starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Read this comprehensive guide to find out what zero-based budgeting is, the potential value it can provide, particularly for IT initiatives, and our four-step process to implementing these techniques.
What Is Zero-Based Budgeting?
Zero-based budgeting (ZBB) is a type of budgeting strategy that must justify all expenses during each new period. It ultimately aims to put this onus on managers to drive value for an organization by optimizing costs and not just revenue.
Using a zero-based budget process enables businesses to create an outcome-based budget within each department, but it is particularly useful for IT initiatives.
How Does the Zero-Based Budget Process Work?
ZBB is an approach that organizations use to review and approve every dollar in an annual budget. Budgets start from a zero-base which allows organizations to make fresh decisions on budgets and build a culture of cost accountability. The ZBB approach brings focus on savings from not just the “what” but the “how.”
Zero-Based Budgeting vs. Traditional Budgeting in IT
Traditionally, IT budgeting takes more of an accounting approach that merely adds funds on the prior year’s budget for undetermined uses.
Does “we’ll just add 3%-5% to last year’s budget and adjust from there,” sound familiar?
Typically, an IT leader subjectively ranks and prioritizes both business and internal IT needs against a non-fact and outcome-based funding number. Doing so requires justification for only variances versus results from the preceding year based on the assumption that a “business-as-usual” budget is automatically approved. Rather than budgeting-as-usual, ZBB is a decision-making approach that requires tying every line item in the IT budget to a business outcome.
Adopting Zero-Based Budget Process
The ZBB method has no assumptions about what level of funding it will take to RUN, GROW, and TRANSFORM the business for the next twelve months. The budgeting process is therefore entirely independent of whether the budget or specific line items are increasing or decreasing but is the starting point for a fact and outcome-based discussion.
Adopting an outcome-based ZBB approach for your department may seem like an intimidating task, but when weighed against the strategic value of having it aligned with business objectives, the effort is well worth the results.
When looking at your in-flight projects today, would (or should) any of the organization’s strategic initiatives make one of the selected initiatives obsolete? Where should you prioritize your security, compliance and customer-mandated projects?
Each organization has to take a pragmatic assessment of whether or not the planned (or “obligated”) initiatives align with and support the organization’s strategic objectives. Should any initiatives that were not selected for the budget be reconsidered? Are there overlapping or redundant capabilities that could be addressed by consolidating initiatives? In IT departments, for example, an organization should think of the budget as three distinct components:
How to Create a Zero-Based Budget Process
Implementing outcome-based ZBB for any department involves these key steps:
- Identifying and aligning business objectives
- Evaluating alternative ways to accomplish each objective
- Defining and agreeing on funding sources
- Setting priorities
The main activities should continuously ask “Why?” and “What are the outcomes if we do not take on this initiative right now?”
The purpose of the process is to drive and align focus on key objectives to eliminate activities no longer relevant to those objectives supporting the desired outcomes.
Step 1:“Define and Identify” your business objectives
Start with outlining the organization’s directives and understanding the desired outcomes. ZBB concepts should be outlined and presented to all levels of an organization so they can begin to develop and collect proposals for spend. Then, organize proposals by their importance and shift proposals upward for more intense study and judgment by top leaders in the organization. The primary difference in this process is that every dollar of spending should go through the same rigorous review process.
Step 2: “How?” What are the approaches to accomplish the objectives?
When developing a proposal, define the details at a level that helps with organizational comprehension. Only in this manner will the owner be able to formulate meaningful alternatives. Initiative and business process owners must look at all methods and choose the alternative way of achieving the objective they prefer best.
Step 3: “How much?” What are the costs for the outcome?
Initiative and business process owners will establish a minimum level of effort and then break out additional levels of funding for evaluation. Reviewing all funding levels may lead to a modification or redirection of selected submissions. This effort helps push initiative owners to rethink their estimates upfront and add validity to the overall process.
Step 4: “When?” In which quarter do we expect to start and when should we see the outcome?
A cost-benefit analysis will help identify the priority of the proposals. The ranking process combined with a final cost-benefit figure will provide management with an effective way to allocate resources and communicate direction. (Who does this? Who makes the final decision?)
Zero-Based Budget Procedures Can Revolutionize Your Budgets
Using a ZBB approach is a repeatable process that forces alternative thinking in setting yearly budgets. ZBB can drive significant and continual savings by building a culture of cost accountability at all levels of the organization. The ZBB approach allows organizations to realize bottom-line savings, improved organizational efficiencies, improved organizational alignment and drive measurable future growth.
For more information or to discover how Liberty Advisor Group can streamline efficiency for your business, get in touch today!
Liberty can help your annual planning process for IT by pragmatically redesigning a cost structure to drive Business/IT alignment and value.
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